Connect with us

Business

Navigating Partnerships

Published

on

[dropcap class=”kp-dropcap”]P[/dropcap]hase II cannabis licensing in the city of Los Angeles (for only non-retail activity) kicked off on Aug. 1 and it will conclude on Sept. 13. To qualify for a city of Los Angeles cannabis license during this timeframe, an applicant must, among other things, be eligible for the city’s cannabis social equity program. This qualification factor has propelled a search for business partners who will make applicants eligible for Phase II cannabis licensing. Though this momentum is spurring business marriages all over the city, many of these “partnerships” are little more than ruses for circumventing the social equity requirements.

It’s not unusual in the cannabis industry to see people rush into half-baked, hasty business marriages for fear that some grand opportunity will pass them by if they don’t. Los Angeles’ social equity component has created a new breed of business “relationship” ripe for scams. Potential applicants on both sides of the social equity aisle need to be aware of the tricks being used to game this new system. The following are some examples of what we are likely to see from social equity cannabis business unions in Los Angeles:

“It’s not unusual in the cannabis industry to see people rush into half-baked, hasty business marriages for fear that some grand opportunity will pass them by if they don’t.”

 

The Tier 1 and Tier 2 Straw Men

To qualify for social equity in Los Angeles you need some combination of “low income” status, a “cannabis conviction,” or having lived in a “disproportionately impacted area” in the city for a certain amount of time. Based on what you can prove as a social equity applicant, your cannabis business will be categorized as a Tier 1 or a Tier 2 business. To be Tier 1, the social equity applicant must have at least 51 percent of the equity in the cannabis business. To be Tier 2, the social equity applicant must have at least 33.3 percent of the equity in the cannabis business. Government rules that require sharing equity make even hardened business people nervous about losing voting control and searching for ways around this rule.

 

The Incubator Terminator

Los Angeles’ social equity program has a Tier 3 cannabis business category that does not involve equity sharing. To qualify as Tier 3, an applicant must provide space, utilities, capital, business assistance and licensing help to a Tier 1 or 2 businesses for no less than two years. Los Angeles is home to a very competitive cannabis market, and few will want to assist their competition and certainly not for free. This means we are bound to see Tier 3 businesses seek to sabotage their Tier 1 or 2 “roommates” so as to strengthen the competitive landscape for their own businesses.

 

“Show Me the Money” Tier 1 and 2 Businesses

We have already seen Tier 1 and 2 businesses essentially selling their status to multiple parties for a quick payout without any actual plans to compete in the Los Angeles cannabis market. These sorts of deals go against the purpose of the social equity program, which was to ensure those most negatively affected by the “War on Drugs” get a meaningful share of Los Angeles’ legal cannabis market.

 

Is Your Partner Really a Tier 1 or 2?

Many in Los Angeles wrongly believe one cannabis conviction is automatically enough to qualify for Tier 1 or 2 status. If you’re looking to partner with a Tier 1 or 2 business, be sure to do your research to ensure they actually do meet the required criteria.

 

Predatory Matchmakers

There aren’t many ways for legitimate Tier 1 and 2 businesses to meet legitimate and willing Tier 3 businesses, and there will always be more than a few questionable 11th hour brokered deals rushed to finish by the Sept. 13 deadline. Many of the “brokerage” agreements we’ve seen have been inadequate, and many deals are going through with little to no due diligence conducted by either party. These agreements are mostly boilerplate forms pulled down from the internet and badly re-purposed for social equity in Los Angeles. Though satisfying Los Angeles’ requirements to qualify for Phase II is clearly important, you should not forget that these agreements will also serve as your legal foundation for a real business relationship with real obligations and liabilities. It is important that your agreement get the details right on things like company financing, leasing, voting and managing day-to-day operations. Most of the “social equity brokers” putting these deals together care only about getting paid their percentage.

 

Tier 3 Management Companies

There’s no such thing as a free lunch, and many Tier 3 businesses giving space, time, money and assistance to Tier 1 and 2 businesses will be expecting a lot back in return. We are already hearing of Tier 3 businesses insisting they become management companies to the Tier 1 and 2 businesses they plan to assist. Los Angeles is planning to address the issue of management companies generally in the city, and that means we will likely see regulations aimed at preventing management companies from cannibalizing the opportunities intended for Tier 1 and 2 businesses.

Los Angeles’ cannabis social equity program is a complicated overall undertaking and if Tier 1 and Tier 2 cannabis businesses thrive in Los Angeles, that will constitute a significant victory for the cannabis industry as a whole.

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *